May 14 (Bloomberg) -- Investors became less pessimistic on equities this month as fears of a global recession eased, a Merrill Lynch & Co. survey showed.

Money managers who together oversee $615 billion became more optimistic about banks, reducing their ``underweight'' stance in the industry to the lowest since mid-2007, according to the largest U.S. brokerage.

``The mix of concerns for investors has changed,'' David Bowers, a consultant to Merrill, said at a press briefing in London. ``Inflation is back on the radar screen, while fears of recession have begun to lift slightly.''

The MSCI World Index has gained 11 percent since reaching its lowest in almost 18 months on March 17 as better-than- forecast economic growth and lower interest rates in the U.S. eased concern that $335 billion in credit losses will cut profit and push the U.S. into recession.

Pessimism toward the U.K. market remained at the highest since 2004 as respondents continued to favor emerging markets. Merrill's poll of 191 fund managers was conducted between May 2 and May 8.

A net 5 percent of the respondents this month said they had an underweight holding in stocks. That's down from 13 percent last month and 23 percent in March. An underweight position means investors hold less of the securities than are represented in asset-allocation models.

The percentage of those believing the global economy is currently in recession fell to 18 percent in May from 24 percent last month. Those saying a recession is ``likely'' in the next 12 months dropped to 29 percent from 40 percent in April.

`Stagflationary Environment'

A quarter of money managers now expect global core inflation to rise in the next 12 months, up from 7 percent in April.

``There is a deeply embedded view that investors are now facing a stagflationary environment,'' Bowers said. ``Concerns about earnings haven't got worse, but they haven't gone away.''

Respondents reduced their underweight stance in banks to a net 22 percent, the lowest since July 2007. That compares to 34 percent the previous month and 41 percent in March. Still, energy shares remained the favored industry group, while investors increased their overweight holdings in technology and material stocks.

U.K. stocks remained out of favor. A net 32 percent of fund managers were ``underweight'' the country in May, the second- most bearish result the survey has recorded. Thirty-one percent said they were underweight in April.

Emerging markets remained the region of choice, with 31 percent of the survey respondents holding ``overweight'' positions. Investor opinions on U.S. and European equities remained neutral, Merrill Lynch said.

Bowers, joint managing director at Absolute Strategy Research Ltd. in London, continues to produce the study after leaving Merrill. He had been chief global strategist at the brokerage.

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

To contact the reporter for this story: Sarah Jones in London at sjones35@bloomberg.net.

Last Updated: May 14, 2008 10:31 EDT